Currency markets are very active this morning with the announcement of the three part plan to solve the lingering debt crisis in the Euro Zone. Overnight European officials came up with a three point plan to restructure Greek debt, leverage the EFSF and recapitalize banks.
Daily December Euro Pattern, Price & Time Analysis
Private Greek bondholders will take a “50% haircut” on the debt they hold. This will helpGreecereduce its debt-to-GDP ratio somewhat but it will remain over 100%. Second, the EFSF will be leveraged four to five times its current size. This will increase the support for sovereign debt markets to close to $1 trillion Euros ($1.4 trillion). Finally, the third agreement declares that banks need to raise over $1.48 billion in order to bring their core Tier 1 capital rations to 9% by the middle of 2012.
The currency markets have been very receptive to the plan. This is not necessarily a vote of confidence that the plan will succeed, but may be because the veil of uncertainty encouraging traders to keep their assets on the sidelines has been lifted. The plan seems big enough to alleviate trader fears in the short run. It addresses the bank capital issue and it gives more fire power to the EFSF to combat contagion. It may not solve all the problems now because cash has to be raised and the new systems implemented, but if there are no unexpected debt flare-ups over the next few months, this plan could be sufficient enough to contain the sovereign debt crisis.
The U.S. Dollar is trading weaker this morning after investor sentiment shifted to a risk on scenario. The December Euro broke out to the upside through the 61.8% retracement level at 1.4017. This price represents a retracement of the break from August to October or 1.4558 to 1.3142. The chart indicates the next upside is a downtrending Gann angle at 1.4138.
This bullish initial reaction to the news in the Euro was expected. Some say the news may have already been priced in also. This makes the market vulnerable to a possible “buy the rumor, sell the fact” top. This usually occurs after buy stops have been triggered and the last trader to get long begins to enter. This means a bull trap could be setting up. Traders should watch for an intraday closing price reversal to be the first sign that a top is forming.
While the market rallies today, keep in mind that this may not have anything to do with the viability or success of the Euro Zone plan. It may just mean that traders can act with confidence today because they have clarity and conviction. While the plan seems to be a good short-term fix, over the long-run the redistribution of money may lead to a slow down in the Euro Zone economy since banks will be forced to deleverage many of their assets to raise the money needed to meet their cap needs.
